Explore

Tuesday, January 12, 2016

Federal Reserve’s “Net Worth” Collapses 33% In Two Weeks

In the following article, Simon Black explains how a bank's net worth is calculated and why this number is important in determining its health. Of course, in contemporary times, banks have lost any normal semblance of solvency, as they loan out money they do not have. However, even within this defunct system, a bank still must maintain adequate levels of capital in order to service debt and handle withdrawals from depositors.As Black suggests, the Fed actually lost 33% of its total net worth over the past month, and by all accounts, it will continue to lose capital.In researching this story, I discovered a change in fed policy which actually requires that it pay surpluses back to the US Treasury, which explains the loss in capital. Apparently the Fixing America’s Surface Transportation (FAST) Act, which was passed in late 2015, has a provision stipulating the new policy. Under act, the Federal Reserve is required to send payments to the US Treasury for any surpluses which exceed $10 billion. Here is an excerpt from the Federal Reserve website clearly stating the policy change, and that a payment was issued on December 28th:

"The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," has been modified to reflect the policies under which Federal Reserve Banks make payments of their residual net earnings to the U.S. Treasury. The Fixing America's Surface Transportation Act (FAST), which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank surplus not exceed $10 billion. Therefore, any amount of aggregate Reserve Bank surplus that exceeds this limit will be remitted to the U.S. Treasury. The line "Interest on Federal Reserve Notes due to U.S. Treasury" on table 6 has been replaced with "Earnings remittances due to the U.S. Treasury" and footnotes to tables 1, 5, and 6 have been similarly modified. The amounts of the line items "Other liabilities and capital" on table 1, and "Surplus" on tables 5 and 6 reflect the payment of approximately $19.3 billion to Treasury on December 28, 2015, which was necessary to reduce aggregate Reserve Bank surplus to the $10 billion limitation in the FAST Act."

One way of looking at this is by measuring a bank’s capital as a percentage of its total assets. (Conservative banks have a high percentage.)

Let’s say a bank has $1000 in assets like cash and loans, and $200 in liabilities (customer deposits).

This means that the bank has $800 in capital, which constitutes 80% of its total assets.

In other words, the value of the bank’s assets can fall by 80%, and the bank would still be able to repay its depositors.

This is a huge margin of safety that is unfortunately almost unheard of in banking.

Right before the crisis, in fact, Lehman Brother’s capital was just 3% of its total assets.

And that leads me to central banks.

Just like regular banks and businesses, central banks also have assets and liabilities.

In the US, the Federal Reserve’s assets total $4.486 trillion, including more than $2 TRILLION in US government debt.

The Fed also has total capital (i.e. net worth) of $39.5 billion.

That sounds like a lot. Until you realize that it constitutes just 0.88% of its total assets. Not even 1%!

This is a tiny, almost nonexistent level of capital at the Federal Reserve.

Put another way, the issuer of the United States dollar, the most widely used currency on the planet, and the central bank of the largest economy in the world, has almost no margin of safety.

This puts the entire global financial system at a tremendous level of risk.

Central banks can and do go bankrupt. It happened most notably in Iceland back in 2008, causing an epic currency crisis in that country.

So running the Fed’s balance sheet down to the nub like this is not exactly a consequence-free course of action.

But what’s really astonishing about all of this is how quickly the Fed’s balance sheet deteriorated. And why.

Just two weeks ago, the Fed’s total capital was nearly $59 billion. And even that wasn’t very much given the size of its balance sheet.

Today it’s $39.5. This is an incredible 33% drop in just two weeks!

Imagine your net worth collapsing by 33% in two weeks; it would probably be a huge personal crisis. Yet the Fed seems completely cool about it.

I did some digging and found out why this happened.

It turns out that Congress and the President passed a law last month called the Fixing America’s Surface Transportation (FAST) Act.

We’ve talked about this one before– the FAST Act is supposed to provide funding for America’s highway system.

But one of the provisions is that a US citizen can have his passport revoked if the government believes in its sole discretion that he owes too much tax. Crazy.

And, buried deep within the nearly 500 pages of legislation is a neat little section demanding that Federal Reserve bank surpluses above a certain amount must be turned over to the United States Department of Treasury.

In other words, the US government is so broke that they’re now confiscating assets from the Fed, putting the entire global financial system at even more risk.

It’s genius!

You just can’t make this stuff up. It’s so absurd it would be comical if it weren’t true.

So, yes, it should be completely obvious by now that there is a tremendous amount of risk in the system.

Governments are completely bankrupt. And even central banks now are being pushed into insolvency by the bankrupt governments they support.

This is not a story that has a happy ending. And whether the consequences arise today, tomorrow, or five years from now is irrelevant.

This is a major risk. And for any thinking, rational person paying attention, it’s imperative to have a Plan B.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

Multiple times every week, we help over 100,000 Sovereign Man subscribers who are taking their family's liberty and prosperity into their own hands with our free publication, Notes From The Field.

Activate your free subscription today, and get fresh intelligence delivered securely to your inbox as we travel the world discovering the biggest opportunities available to smart, enterprising individuals like you.

Consider contributing to this site

Hope you like this not for profit site.We could not devote so much energy into continuing this blog if it was not for the support of readers.

We greatly appreciate any support you provide!

Fair Use of Information for ALL
All data is freely available to the ALL, as an inherent inalienable right of consciousness and existence, for the use of any being in creation. No Claim of Ownership is made by MDT, for any data presented on this page or elsewhere.
Any information, writing, photographs, videos or content on this page is freely available to ALL without claim of Intellectual Ownership. We advise providing attribution to this website (MakingaDifferenceToday369) when, and if, data herein presented is used elsewhere; so as to remain honest, transparent and to maintain the public trust as to where the information was found.
Any and All data herein presented has been re-claimed for the collective benefit of all sentient life from any and all parties who seek to limit its dissemination. Any claims of intellectual ownership or copyright, that were once ascribed to content on this page, or elsewhere, is NULL and VOID; as a result of a misrepresentation of right of ownership and breach of trust by any party whom presumes to claim title and exclusive right of use.
No requests, threats, or notices which seek to limit the sharing information for the benefit of ALL will be honored. However, a humble request to provide information in a certain way or form will be considered, up to and including, the partial removal of data, and only as an agreement between 2 honorable parties whom fully disclose and honor a moral duty to the truth.
FAIR USE NOTICE:
This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. It is being made available in an effort to advance the understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, and so on. It is believed that this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.
In this respect we are in accordance with the statutes as well as Natural Law. ﻿
Issued pursuant to and governed by I AM, eternal essence, in body. MDT is a humble messenger of the One Infinite and Absolute Creator, in service of the Truth and the ALL.